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Inflation raises consumer misgivings over B.C. retailer profits

Aritzia last year generated its most profit and highest profit margin since it went public in 2016
Shoppers earlier this month leaving Aritzia's flagship store on Robson Street in Vancouver

With inflation soaring, many consumers are wondering which companies in products’ supply chains are padding bottom lines with excess profit.

While some believe retailers are taking advantage, executives often say they are simply passing on higher wholesale costs.

Profits for many retailers have risen because inflation has pushed up prices, forcing customers to spend more for the same products. With flat profit margins, that translates into more net income.

A look across the retail spectrum makes clear that corporate profit margins vary widely depending on what products are sold.

Discretionary-spending retailers have a wider array of profit margins because they sell products people want but may not need immediately. That can prompt discounting and promotions, which erode profit margins, DIG360 retail analyst David Gray told BIV.

Retailers selling essential goods, in contrast, tend to have lower and more stable profit margins, he said.

Major Canadian grocers' net-profit margins have stayed relatively flat, at between 2.5 per cent and 3.75 per cent in the recent fiscal years, and recent quarters.

On the other end of the scale, the British Columbia Liquor Distribution Branch's (BCLDB) profit margin for alcohol sales was 27.3 per cent in the fiscal year ended March 2022 – down from 28.1 per cent in the previous year, indicating that the Crown corporation is not gouging customers any more than it historically does for what many see as non-discretionary products. That BCLDB profit comes from both wholesale and retail revenue.

All of the BCLDB’s $1.19 billion in profit went to the B.C. government to fund health, education and other services. Victoria also received an additional $52 million from the BCLDB, as the Crown corporation whittled down extra cash on its balance sheet. The province separately gets money by applying the provincial sales tax to alcohol sales.

The government-owned liquor seller's profit comes in part because it did not invest to open any new stores in its last fiscal year. It did, however, renovate 10 stores and relocate one store in the year that ended March 31. It plans to renovate 12 stores in the current fiscal year.

Fashion retailers’ profit margins can be all over the map – if there is profit at all, Gray said.

Lululemon Athletica Inc. (Nasdaq:LULU) and Aritzia Inc. (TSX:ATZ) are the two largest B.C.-based publicly traded fashion retailers, and both are doing exceptionally well in part because they have strong e-commerce and physical presences, Gray said.

Lululemon generated more than US$975.3 million in net income in the fiscal year that ended in January, thanks to a 15.6 per cent profit margin on sales. That profit was up 65.6 per cent from the previous year, when Lululemon generated US$588.9 million on a profit margin that was less than $13.4 per cent.

Since January, Lululemon's profit margin has declined, indicating that it is not gouging customers.

Lululemon’s profit margin in the quarter that ended July 31 was 15.5 per cent – largely in line with what it was last year. That was a rise from the quarter ended May 1, when Lululemon’s profit margin dipped to 11.8 per cent.

Inflation has cut into what Lululemon can do with its profit.

North American inflation rates peaked in June at 8.1 per cent in Canada, and 9.1 per cent in the U.S., where more than two-thirds of Lululemon’s sales originate.

Flush with cash, Lululemon has been buying back stares hand over fist. The company bought and cancelled 2.2 million of its own shares in 2021, for a total cost of US$812.6 million. In March, it announced a new stock-repurchase plan to buy back up to US$1 billion worth of its own shares.

Stock buybacks have the effect of pumping up the company's share price, which is good news for Lululemon executives.

CEO Calvin McDonald saw his compensation jump 25.3 per cent in 2021, to $13.3 million. Most of what he earned, however, came in the form of stock and option awards, valued at US$8 million but dependent on the future value of the company's shares.

Lululemon does not pay dividends to shareholders.

Over at Aritzia, its net income tanked during the early phase of the pandemic, but bounced back stronger than ever the following year.

The women’s fashion house generated $90.6 million in net income in the pre-pandemic year that ended March 1, 2020 – just before COVID-19 restrictions forced many stores to close. Its profit margin that year was a healthy 9.2 per cent.

Revenue then slid 12.6 per cent in the year ended Feb. 28, 2021, but net income dove 78.8 per cent to $19.2 million, as Aritzia’s profit margin fell to 2.2 per cent – below that of the average grocer.

When COVID-19 restrictions loosened, in the year ended Feb. 27, Aritzia turned things around. It generated $156.9 million in net income, thanks to a 10.5-per-cent profit margin – its highest net income and profit margin since the company went public in 2016.

Like Lululemon, Aritzia has been buying back shares for years. In 2019, it used share buybacks to enable large shareholders – Berkshire Partners LLC and First Capital Realty Inc. – to unload stakes in the company without having to do a bought deal or institutional sale.

Those firms sold their stakes to Aritzia, which cancelled the shares.

Earlier this year, Aritzia announced that by Jan. 16, 2023, it would repurchase up to 3,732,725 shares, representing 4.2 per cent of the company.

Aritzia provided far less compensation to its CEO, Brian Hill, than Lululemon did to McDonald.

Hill earned $1 in salary, $1 as part of an annual incentive plan, $1.5 million shares, $1.5 million in stock options and $8,400 in other compensation, for a total $3,008,402 pay package.

Earlier this year, Hill owned more than $1.08 billion worth of Aritzia shares. He has been shedding his holdings to diversify assets through mechanisms such as a $70-million bought deal that was announced Nov. 14.

Lululemon and Aritzia's profit margins far outpace those at some other publicly listed B.C.-based retailers.

KITS Eyecare Ltd. (TSX:KITS) in the quarter ended Sept. 30 generated its first profit as a public company: $20,000 on a razor-thin profit margin.

Recent earnings reports from the online fashion company RYU Apparel Inc. (TSX-Venture:RYU) show that it is losing money, though it is stemming losses.

Global fashion houses tend to have lower profit margins than do Lululemon and Aritzia. The most recent quarter for The Gap Inc. (NYSE:GPS) showed it had a seven-per-cent profit margin, TJX Cos. Inc. (TJX) had an 8.7-per-cent profit margin and Ralph Lauren Corp. (NYSE:RL) had a 9.5-per-cent profit margin.

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